World Economic Forum: scaling up transition financing a critical priority

Investment in the net-zero energy transition needs to increase to $4.5 trillion a year and more financing must be channelled to developing countries, which receive just 15% of energy transition investment, according to the World Economic Forum.

The significant challenges facing energy transition financing have created an investment gap that can only be addressed through targeted measures, according to the Forum’s recent white paper on ‘Financing the Energy Transition: Meeting  a Rapidly Evolving  Electricity Demand’.

Challenging landscape

Challenges facing global investment in energy transition technologies include high upfront costs, increased risks, inflation, supply chain constraints and high interest rates, it said, adding that regional disparities also pose significant challenges, with each region facing its own unique set of barriers to advancing its energy transition goals.

“The energy transition is not just a technological challenge; it is a financial one. We must mobilise and channel investments and forge partnerships across regions and sectors,” Anna Borg, CEO of Vattenfall, said in the report.

“Many options are already available … including Power Purchase Agreements (PPAs) that are a prime example of how industry can collaborate to drive progress, while governments play a crucial role in de-risking through guarantees and maintaining a policy predictability that investments into long-term assets require,” she added.

Record investments

Despite record levels of investment in the energy transition, most regions are falling short of what is needed to meet climate goals, according to the Forum. The gap between current investment and required financing is even more pronounced in emerging economies and developing countries, which currently receive only about 15% of global energy transition investment.

To effectively manage the energy transition, several key issues that impact the financing and deployment of energy transition projects must be addressed, the Forum advocated.

Energy security and affordability

These include energy security and affordability, as a successful energy transition requires a delicate balance between energy security and affordability. Energy security ensures a reliable and uninterrupted supply based on strong supply chains and resilient transmission and distribution grids, while affordability guarantees access for all, it said.

De-risking innovative technologies is another key component. Innovative technologies with a strong business rationale but limited operational history require risk mitigation measures to become bankable, the Forum said. Governments and financial institutions can play a pivotal role in reducing or reallocating these risks through insurance and guarantee instruments (e.g. export credit agencies (ECAs) offering project-specific guarantees or insurances), thereby encouraging investment in such ventures.

Hedging offtake risks

The risk of upfront investments in clean energy can be mitigated by ensuring that offtake agreement protection is available through financial tools that guard against price swings, the Forum said.

Mobilising capital for developing countries, on both the debt and equity side, is also critical to achieving global energy transition goals, according to WEF. This includes the use of blended finance solutions (e.g. combining public and private funding through development finance institutions (DFIs), concessional debt from governments and philanthropic capital) to fill investment gaps and to make projects more attractive to private investors.